Traditional banks may be in trouble due to digital banking

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More millennials are moving toward digital banking, and as a result, they're walking into their banks' traditional brick-and-mortar branches less often than ever before.

This generation accounts for the greatest share of the U.S. population at 26% and the employed population at 34%, so it's easy to see why their behaviors and preferences will have a profound effect on the future of the banking industry, particularly with regard to the way banks interact with their customers.

Third parties are expanding their role in providing services that consumers use to manage their money. And the more that role grows, the more it will disrupt the relationship between banks and their customers.

To paint a clearer picture of the future of the banking industry, John Heggestuen, managing research analyst at BI Intelligence, Business Insider's premium research service, surveyed 1,500 banked millennials (ages 18-34) on their banking behaviors and preferences — from their preferred banking devices, to what banking actions they perform on those devices, to how often they perform them.

The bank branch will become obsolete. It will be some time before the final death rattle, but improving online channels, declining branch visits, and the rising cost per transaction at branches are collectively leading to branch closures.

Banks that don't act fast are going to lose relationships with customers. Consumers are increasingly opting for digital banking services provided by third-party tech firms. This is disrupting the relationships between banks and their customers, and banks are losing out on branding and cross-selling opportunities. For many banks, this will require further commoditization of their products and services.

The ATM will go the way of the phone booth. Relatively low operational costs compared to bank branches, paired with customers' preference for in-network ATMs, makes the ATM an attractive substitute for bank tellers. But as cash and check transactions decline, the ATM will become nonessential, ultimately facing the same fate as the physical branch.

The smartphone will become the foundational banking channel. As the primary computing device, the smartphone has the potential to know much more about banks' customers than human advisors do. The smartphone goes everywhere its user goes, has the ability to collect user data, and is already used for making purchases. Therefore, the banks that will endure will be those that offer banking services optimized for the smartphone.

In full, the report:

Analyzes how millennials use bank branches and why - even though there are a large share of millennials who still use branches, making significant investments in these channels isn’t a good move for banks.

Explains how mobile payments and mobile point-of-sale adoption by small retailers will make the ATM obsolete.

Describes how digital channels, particularly the smartphone, will become the foundation of the bank-customer relationship.

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